‘Is My Money Safe?’ and Other Questions to Ask

For all of you on Main Street who have been watching the turmoil on Wall Street for the last few weeks, Monday’s shockwaves rattled even the most steadfast.

The day began with the announcement that another big bank — Wachovia — had been taken over, just days after Washington Mutual collapsed and was sold. In early afternoon, the House rejected the bailout package for the financial industry. Stocks plunged, with the Dow ending the day down nearly 778 points in the worst single-day drop in two decades.

What is a regular investor to make of it all? What about people who have money in bank accounts? Below are some answers to questions that are probably on your mind.

Q. Why did the stock market fall so far so fast on Monday?

A. The element of surprise surely didn’t help, since everyone was expecting the bailout bill to pass. There may have been a bit of investor disgust thrown in, too, a sense that our representatives in Washington just don’t get it.

Fear may be the biggest driver, however — the worry that it may be weeks or longer before companies can get the affordable, short-term loans they need to finance their operations. Without easy access to that money, it’s hard to run a profit-making operation on a day-to-day basis, let alone grow over the long haul. The professional investors who often drive big market moves don’t want to hold onto stocks to see if things will really get that bad.

Q. What’s likely to happen in the markets over the next few days?

A. It’s possible that Monday’s market moves will spook members of the House of Representatives enough that they will be willing to change their votes with only a modest amount of compromise. Or, there may be hasty efforts to write a new bill from scratch. This will take days, however, not hours, since Tuesday is the Jewish holiday of Rosh Hashana. Stocks may rebound, at least somewhat, if another similar bill emerges. But much will depend on the revisions.

Q. Is any investment truly safe right now?

A. As long as you trust the United States government, sure. Plenty of banks, like HSBC Direct and Capital One are offering online savings accounts paying more than 3 percent. These accounts have all the normal Federal Deposit Insurance Corporation protections of at least $100,000. Also, the Treasury Department is currently insuring investors who had holdings in money market mutual funds as of Sept. 19, as long as the fund company pays to participate.

Q. What about Treasury bills?

A. Treasuries are issued and backed by the United States government. But since throngs of investors have rushed into these investments, it has pushed their yields down. Way down. Some Treasuries, with maturities in the one-week to three-month range, are yielding less than 1 percent, anywhere from 0.10 percent to 0.50 percent. Clearly, many investors are willing to accept paltry yields as long as they know their money is secure.

Another government offering is Treasury Inflation-Protected Securities, or TIPS, which protect investors against rising inflation. That may be one result of any big government bailout.

Q. My retirement portfolio has been wrecked by this. How should I respond?

A. Continue to save. Big losses mean you’ll need that much more time, or good news, to bring your balances back to where they need to be for you to retire comfortably. If your employer matches your contributions, this is a great time to take advantage of the largess.

As for whether you should pile into beaten down stocks, no one knows how much further the markets will fall or how long they’ll take to bounce back. But people who move their savings to ultrasafe investments and then leave them there usually miss out on the gains when the markets come back. If you need to do that to sleep at night or avoid stomach ulcers, then do what you have to do. But it may cost you in quality of life come retirement time.

Q. But what if I am about to retire? Then what?

A. Leaving the work force at a time like this creates big problems. Not only is your portfolio down, but you need to start withdrawing from it. So you are essentially locking in your losses.

If your portfolio has taken a big hit, it may be time to seriously consider delaying retirement. Working just a few years more can make a big difference. Or, a part-time job may keep you from having to dip into your portfolio before it recovers. To get a better idea of how much you can afford to withdraw, you can test different amounts with a retirement income calculator on the Web, like T. Rowe Price’s.

Q. With things looking increasingly gloomy, though, why not allocate extra cash to other types of savings or paying down debt?

A. If you’re saving for a downpayment, you could put enough money in your retirement account to match any employer contribution. Then, use whatever money you have left for the downpayment fund, which should be in an ultrasafe account. The same logic goes for a teenager’s college fund, which ought to be mostly in steady investments by now. There are nice tax breaks on 529 college savings accounts, too.

Yes, paying down debt, especially high-interest credit card debt, is always a good idea, though it’s probably best to take advantage of employer matches on retirement savings first.

Q. Is it time to buy stocks?

A. Like gambling? This is a great time to make bets on the wide price swings that we’re seeing in some stocks and entire sectors of the market. Just be prepared to lose big, as plenty of professionals have done of late.

Q. I’m worried sick about my parents, who rely on stock dividends for their income. What will happen to them?

A. It’s not a great time to be relying on dividends. We’ve seen plenty of companies cut them. (Citibank did so on Monday as part of its acquisition of Wachovia’s banking operations.) Still, if your parents were planning all along to keep their shares until they die and live only off the dividends and Social Security, perhaps now is the time to encourage them to be selfish. They could sell some shares and live well now, even if it means you’ll get less later when they pass on.

Q. I’m a long-term investor and prefer not to see my retirement balances as real numbers for now. So the crisis doesn’t feel like it has hit me financially yet. Should I be doing anything defensively?

A. It’s not yet clear how much more the crisis will affect employment levels. Still, this seems like the best moment in years to have a few months of cash set aside in one of those online savings accounts just in case you lose your job or face some large expense that you haven’t predicted.

Q. What’s the next shoe to drop?

A. It seems certain that it will be harder for consumers to borrow money in the next year or two than it was earlier this decade. How much harder isn’t clear yet. It will be more difficult for people who need jumbo mortgages than for those whose lenders can simply sell off their loans to Fannie Mae or Freddie Mac . Home-equity lenders are already cutting plenty of people off, while credit card companies are lowering credit limits on others.

Q. What about more bank failures?

A. They will happen. In recent days, we’ve seen the F.D.I.C. getting out in front of troubles at big banks like Wachovia and Washington Mutual, by arranging for other banks to take over their consumer accounts. What’s less clear, however, is how many healthy institutions are left to take in other big banks that may run into trouble.

As always, stay within F.D.I.C. deposit limits. Then, the worst-case scenario is that it will take a couple of days to extract your funds from a failed bank.